VZCZCXRO6156
OO RUEHMA RUEHPA
DE RUEHUJA #2240/01 2951631
ZNR UUUUU ZZH
O 221631Z OCT 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1253
INFO RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHZK/ECOWAS COLLECTIVE
RUEHOS/AMCONSUL LAGOS 8121

UNCLAS SECTION 01 OF 02 ABUJA 002240 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EINV PREL NI
SUBJECT: NIGERIA:  BANK CAPITALIZATION - OVERHEATING, OR 
OVERBLOWN? 
 
REF: A. LAGOS 00654 
 
     ¶B. MOSS/TANSEY EMAILS 
 
SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY. 
 
¶1. (SBU) Summary:  Nigeria's bank reforms, recapitalization, 
and consolidation in the sector have been positive and in 
line with other macroeconomic and financial reforms.  Rapid 
capitalization has raised the issue of possible overheating 
if Nigeria's commercial banks rush to push available funds to 
a limited set of customers.  In our view, overheating is 
unlikely to occur, at least in the short-term, because the 
Nigerian banking system is not yet mature, and loans to 
industrial and infrastructure projects remain limited. 
Banking experts contend that rates, rather than holdings, 
will determine how much money flows from the 
newly-consolidated banks into the domestic economy, and 
managing a share of Nigeria's growing foreign exchange 
reserves may be the main impetus for the continuing strong 
capitalization trend. GON policymakers may need to adjust the 
regulatory environment to encourage longer-term lending as 
well as access to capital markets to promote industrial 
development.  End summary. 
 
--------------------------------------------- ------ 
Could Positive Banking Reforms Lead to Overheating? 
--------------------------------------------- ------ 
 
¶2. (U) Nigeria's bank reforms, recapitalization, and 
consolidation over the past two years have been positive and 
in line with other macroeconomic and financial management 
reforms.  Reftel reported on the second phase of 
capitalization and the status of bank mergers and 
acquisitions.  Clearly, the banks have accumulated large 
capital reserves.  The extent of rapid capitalization raises 
the question of possible overheating if Nigeria's commercial 
banks rush to push available funds to a limited set of 
customers. 
 
------------------------------------ 
Unlikely, At Least in the Short-term 
------------------------------------ 
 
¶3. (SBU) In our view, overheating is unlikely to occur, at 
least in the short-term.  In some significant ways, the 
Nigerian banking system is not yet mature, and loans to 
industrial and infrastructure projects remain limited.  While 
the banks are expanding their business base, as noted in 
reftel, they still tend to focus on "easier" areas like trade 
letters of credit and retail banking, but are very 
conservative loaning to the real sector. 
 
¶4. (SBU) Industrialists tell us they face effective interest 
rates of 20-30 percent.  The banks also strongly prefer 
short-term loans--thus borrowing to build factories or 
improve infrastructure remains difficult.  The Chairman, of 
First Bank, Nigeria's largest commercial bank, told Econcouns 
that his bank would not/not accept some of the applications 
resulting from its capitalization offers, because it can 
not/not make productive use of all the  money.  He said other 
banks will make similar judgments. 
 
¶5. (SBU) First Bank is venturing into West Africa and even 
Europe.  It has a full-fledged branch in London, a rep office 
in South Africa, is applying to establish an office in China, 
and has been interested in the U.S. market for some time. 
First Bank has other interests in property development, both 
within Nigeria and elsewhere.  Asked about the possibility of 
overheating and whether First's recent capital accumulation 
will make its way into Nigeria as new working and investment 
capital, the chairman again pointed out the bank's interest 
in other West African countries and Europe.  He himself was 
headed to South Korea via Dubai to explore other 
international possibilities, following attendance at the 2007 
World Bank/IMF meetings in 
Washington. 
 
¶6. (SBU) There is little evidence that the process of 
capitalization and consolidation to date has actually led to 
increased lending to the real sector.  Experts on the banking 
sector tell us that rates, rather than holdings, will 
determine how much money flows from the newly-consolidated 
banks into the domestic economy.  As also noted in reftel, 
some experts believe that the opportunity to manage a share 
of Nigeria's growing foreign exchange reserves may be the 
main impetus for the continuing strong capitalization trend. 
 
 
ABUJA 00002240  002 OF 002 
 
 
--------------------------------------- 
But, Could Capitalization be Overblown? 
--------------------------------------- 
 
¶7. (SBU) At this point, it is possible that Nigeria risks 
going too far with bank capitalization; bank capitalization 
has dominated financial markets to the point that it is 
probably pulling funds away from other productive uses.  In 
2006, the Nigerian Stock Exchange considered and approved  62 
applications for new issues plus mergers and acquisitions, 
valued at 1.4 trillion naira, compared to 52 applications 
worth 731 billion naira in 2005.  The banking sector 
accounted for 41 percent of the volume of issues in 2006, 
with 21 applications valued at 577 billion naira. Forty 
non-bank corporate issues totaled 679 billion naira. 
Contacts outside the banking sector complain to us that those 
benefiting from non-bank corporate issues are already 
well-established, such as members of the Dangote Group of 
companies, while less well-known firms have difficulty 
accessing capital markets. 
 
¶8. (U) As for the banks' own lending, it is not contributing 
strongly to the much-needed growth of Nigeria's industrial 
base.   A report by Augusto and Company, Nigeria's foremost 
rating agency, on the state of Nigeria's banking sector in 
2006 showed that bank lending to the real sector has not yet 
accelerated.  The report shows that the banks still 
concentrate on trading and general commerce, including export 
financing, importation, and other intermediation activities. 
Twenty-nine percent of lending went to trading and general 
commerce.  Manufacturing received only 15 percent of 
cumulative credit in 2006. 
 
------------------ 
Time to Re-direct? 
------------------ 
 
¶9. (SBU) Comment: It may not be in the best interest of the 
Nigerian economy for banks to focus mainly on capital markets 
for funds.  Banks are eager to mobilize money in that way, 
while non-bank enterprises don't have the option of building 
up a capital base from savings deposits.  Future success 
requires policy makers and regulators to improve conditions 
in support of longer-term bank lending to industrial and 
infrastructure projects, while making it easier for non-bank 
borrowers to also access capital markets.  Otherwise, there 
is the possibility that Nigeria could develop a rich banking 
sector while investments that provide employment and 
diversify the economy remain neglected.  End comment. 
PIASCIK